Obama Bluffs on ReFi?

Millions of innocent Americans have seen their home values decline. And while government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief.

And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.

I found this interesting, and can’t wait to see the legislation that the Prez is going to offer up.

I have written four articles on the topic of a Mega ReFi (here, here, here and here). The first one was back in August. At first I thought there might be something behind all this talk. Now, five months later, I think it's all gas. We’re not going to see any big ReFi plan until after the next election. These are the issues as I see it:

The Administration has been trying to come up with programs that would aid underwater homeowners. This problem is, by far, the biggest domestic drag on the economy. So it makes sense that the Obama team is looking for ways to deal with it. There is one enormous impediment that they face in achieving this lofty objective. They don’t have the money to fill this very big bucket. If they tried to pass a bill that would raise the odd $200-300 billion needed, they'd fall flat on their face.

The Administration's thinking has been that underwater borrowers should get the benefit of today’s lower interest rates, and it should not matter if the borrowers are underwater by 25% or more. The White House would like the unrealized losses to be rolled over at a low enough interest rate to let those borrowers dig their way out of the negative equity hole in five or ten years.

To achieve all this, the President’s men leaned hard on the one guy who had to sign off on the plan. The President had to ask the permission of Edward DeMarco, the Acting Director of FHFA. DeMarco is ultimately responsible for what happens with our dear friends, Fannie Mae and Freddie Mac.

I have followed DeMarco’s words since he was appointed Acting Director. He repeats the same thing every time he has a chance to describe the goal of his job:

As FHFA has noted on numerous occasions, with taxpayers providing the capital supporting the Enterprises’ operations, this “preserve and conserve” mandate directs us to minimize losses on behalf of taxpayers.

In my opinion DeMarco has lived up to that. He has taken steps that have reduced the risks and the ultimate costs that the taxpayers face with Fannie and Freddie (F/F) . It’s for that same reason that he has not allowed F/F to be the agencies of the Administration’s economic plans.

These plans would force F/F to reduce interest rates on outstanding mortgages. As some of those mortgages are in inventory at F/F, the ReFi will result in additional losses. More importantly, the ReFi’s will require a waiver of many existing representations, and warranties of existing borrowers. In the end, there would have been a cost to all of this. The plan was for F/F to absorb the costs over time, and therefore kick the can down the road. (Why the President said there would be no cost)

DeMarco has nixed those plans. I’m amazed by this. DeMarco has been beaten up by the likes of Elijal Cummings (the new wanna-be Barney Frank of housing, ....only in America…)

The President can send powerful forces wherever he likes.

He has very tough guys available to do the really hard jobs when needed.

But even the President can’t bend Ed DeMarco. The reason, I believe, is that Mr. DeMarco has “protection”.

A year ago, the Administration tried to junk DeMarco. It wanted its own guy in charge of the old Agencies. It wanted Ed out of the way so that they could conduct economic policy (quietly) using F/F's $6 trillion of power.

I thought the appointment was a shoo-in at the time. That was not the case. The appointment was squashed by one of the strongest hands in D.C. - Senator Richard Shelby (R. Al) put his thumbs down. Without Shelby's support in the Senate, no appointment was going through. So DeMarco kept his job, and the Administration's plans got checked by powerful forces. The question is, “Is this check mate?”

The legislation that the President promised in his SOTU address can’t be a rehash of what was previously tried with Fannie and Freddie. That door is closed, at least until the next election. Therefore, I anticipate that the President will attempt to use the other big D.C. player in the mortgage business, the Federal Housing Authority (FHA). This entity could, in theory, be used to achieve Obama’s objectives. It could guarantee the payment of the new mortgages that would be required. In the process, it would transfer risk (both credit and interest rate) from F/F to FHA. That would make DeMarco happy.

While this plan is a possibility, it will never happen. The FHA is already in financial jeopardy (link). It needs a capital injection into its reserve fund for the existing book of business ($1T).

FHA would need a very big slug of additional capital to handle the ReFis that the President wants. (There are approximately 10mm homeowners, all underwater who would be eligible.) There is no way in hell that the FHA could get that much money this year. To do so would require the blessings of Senator Shelby. He has already tipped his hand; he won't back off in 2012.

I think we will see some legislation on this from the WH. It will get talked about on TV, but it’s dead on arrival. The President will claim that he tried, and he will blame Republicans for the failed effort. I wonder if the upcoming failed effort is not a "planned failure". One that has been put "out there" purely for the political theater that will come with it.

President Clinton abused used F/F. He wanted the Agencies to be an engine of his social objectives. Bush also abused used F/F. He wanted F/F to be an economic engine while the country was at war. Obama also would like to use abuse F/F. He's trying to trump what the last two Presidents did. He wants F/F to be the vehicle (and the loss generator) for a big ReFi plan, and he wants to use the Agencies to push his social agenda. I'm amazed that after all of the history with the Agencies that this Administration is repeating the sins mistakes of the past.

Bully for Ed DeMarco for standing up on behalf of the folks that will foot this bill, the poor taxpayers.

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Lets see if I got this right...if I re-fi at "historically low rates" with after tax dollars, I get the privilege of paying increased closing costs to the bank (the fee O'Barry describes, that will be tacked on to the closing by the bank) to compensate for my never missing a payment and paying my mortgage on time?

There is one enormous impediment that they face in achieving this lofty objective. They don’t have the money to fill this very big bucket. If they tried to pass a bill that would raise the odd $200-300 billion needed, they'd fall flat on their face.

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There is also the enormous impediment of trying to persuade all the voters that have been paying their mortgage on time, that this is an acceptable course of action -- fsck that!

I am selling a house and have had two FHA-backed mortgage offers by interested parties getting 97.5% and only needing to put up 2.5%. This is a far cry from what others are saying that you need a minimum of 20% down.

Here's a crazy idea. Why not let those who are overextended move on along and allow those who were prudent to purchase a home at a lower cost? Until these deferred losses work their way through the system, the drain on the economy will continue. Once the housing markets seeks and finds its own level, government intervention will continue to convolute the market and unintended consequences will be the order of the day. Do you realize if TARP had never happened, if all the bailouts never happened, and if foreclosures were allowed to proceed in a normal manner, the bulk of all this economic fecal matter would have already passed through the system and in spite of our current Wizard of Oz, we would be well on the road to recovery.

Right now the sole mrtgage originator in the USA is the Federal Government. The phuckers on looney street have no problem with that...and for the record neither do I. The Feds should complete "the final solution" by simply buying the house from the owner and be done with these bankster clowns once and for all.

I see no reason to doubt the big refi. It is the only thing they can do. The banks got their bailout, which never shuld have happened. The refi is what should have been done from the start. People paying off their mortgages will actually stop the loans from going bad. Giving money to banks will not. In the end, that is what needs to be done. Any bank that complains should be forced to buy back all their loans frm the Gov at the full value the Fed/Tresury paid, be shut off from the the Fed window, and be forced to use mark to market accounting. That ought to shut Jamie Dimon up.

I just bought a house for 18,762. that last sold for lent funds by a bank in 2010 for 139,100. The tax cows sold it to me for a horrendous loss as it is HUD. It needs work, but it is not a bomb crater.

Is this the type of loss to the taxcows that Mr. Obama wants to pass along?

Should any of this happen to actually pass, here is what I can guarantee will happen:

1) Any loan refi using this method would be switched to a full recourse loan from a non-recourse loan, odds are they will use small print disclosures to get the job done.

2) Banks will likely try to add balloon payments onto the end of the loan to "make up" the difference at the expense of the homeowner. This too will be disguised as to not be obvious.

3) Banks will try to get owners to sign off liability for any document problems, such as they cannot find the original note, never recorded the title properly, robosigned etc. This is almost a no brainer. It would also not suprise me if the Obama administration "helps" them write the legalese and suggests courses of action, all without being upfront.

Instead of all this baloney, why not just tell the banks to knock 2% off of EVERY home loan rate, the govt will pay the interest directly to the banks to make it up. This requires no "refi", is simple, and odds are the costs would be substantially lower. However, this does not generate fees for the banks, nor does it let them once again "recreate" cdos and sell them in the market to generate even more money, and it does not provide them a weasel way to get out of legal liability for what they have done.

All this re-fi business is nonsense, anyone that could get a re-fi has already done so. I suspect a large number of those still in trouble have a NINJA loan and now you'd have to give them another NINJA loan.

I know several people paying north of 6.5% who are current, upside down, and cannot get a refi, public or private (and have expended significant energy with the public option to no avail). Its anecdotal, but its happening. None are in trouble per se, but getting shafted with interest and could be buying several more ipads per year if they could refi.

Whats kind of sad is their loans are probably pakaged in pools trading for 65 cents on the dollar, yet they cant refi it at 100% of the outstanding balance.

As you observe, Obama does not care if his plan to help homeowners passes. The real goal is to address the unmarketable assets held on the Fed's "balance sheet" that were purchased at whatever value their holders declared for them when they were sold to the Fed. Until those assets are marketable, Obama's bosses are at risk.

The problem in the United States is that the Mortgage Backed Securities (MBS’s) are worth less, far less than they should be:

·Many of them have involved millions of mortgages executed fraudulently with the MERS system which resulted in broken chains of title (i.e. the recovery process requires the seller to repay the original purchase price to the holder, the “banks” would have to pay par value back to the Federal Reserve and a host of other entities. This is a problem because the banks don’t have that type of capital.)

·The same mortgage has been sliced and diced among multiple MBS’s. This is criminal fraud on a scale never achieved before. It is the largest applicable situation for use of the R.I.C.O. Act put in place in the early 1970’s to enable the breaking up of organized crime by allowing the seizure of not only the “illegally gotten goods” seized at the scene of a crime but ALL the personal assets of ALL of the individuals deemed to have conspired together to see the crime committed.

·Both sets of crimes have been documented for easy prosecution (e.g. the facts are prima facie and any assistant D.A. should be able to get plea deals from the small fish in less than five minutes – because a conviction would take a couple of days and these dear folks would be going to prison to shower with Bubba for twenty years) by the MERS systems and all of the documentation required to create the trust documents known to us a MBS’s. In point of fact, the MERS database makes documenting the crimes committed remarkably easy.

The current administration is pushing very hard for a national settlement with all the banks that would pardon all the crimes committed for $ 25 billion – or about the amount of land clerk office filing fees the banks have avoided by using MER’s for the last 10+ years.

This article linked below does a good job of bringing the global level of QE into perspective. One thing to remember, they are using the phrase “balance sheet” here very loosely. In normal usage it would mean that the assets owned are listed in a transparent manner so outsiders can evaluate the true value of the assets. All of the Central Banks have purchased troubled assets in their markets at par value - what their previous owners declared they were worth, not what they would have brought at market value. This was seen as a necessary fiction that would in theory prove to be true over time.

It's all about who has the dirt on who. Politics, it's a shit eating food chain, essentially. The fullest wins. And if you're so full of shit you never said anything credible, how could anyone have anything on you?

Live in a cardboard box in Southern California, buy a small solar panel to charge your iPhone. Great.

I went to Baha California a number of years ago, and people had cut cars in half, buried them halfway and soldered them into clover leaf dwellings. Doors and windows built in, Detroit pre-fab.

Even better than cardboard ...

Housing has been used time and time again to stimulate the economy, but there is a conundrum at work.

While industrial jobs were offshored (as Apple says, Americans can no longer work as hard or in as well disciplined a fashion as the Chinese), jobs in the construction industry were over the bordered, with ready and cheap hispanic labor. Even if you get the housing market up and running again, who is going to be building the houses? Can you imagine what unemployment would have been if everyone in the construction industry was a US citizen / legal resident? Maybe costs would have prohibited the speculative bubble in the first place.

There is some selling in Fl. and SoCal of upper/middle good neighborhood single family at asking and a little bidding up. That may be cash buying and it may be to some extent Chinese. I do not know about other markets, but there appears to be some support in portions of these two markets.

There are three problems with getting people to stay in over valued homes. One is the continued rise of unemployment voiding the increase of buying by younger families that in yesteryears would create some demand. Two, there is there is no end in sight of the shadow inventory. No matter what the enticement to buy is, buying a home that is going to fall in value makes little sense. Why stay in a home and pay for falling value of investment?

The only thing that may increase the buying of single family unit dwellings is the cost of rent. But, the increase of new multi family units that is starting could neutralize that.

There is lots of misunderstanding of these so called refi plans. Promoting refi's of EXISTING GSE loans in fact DECREASES the risk to the taxpayer in that the credit risk of these loans are already owned by the government. Refinance of non-agency loans to be guaranteed by FHA or any other govt entity is very RISKY and ADDS to taxpayer risk. Holders or premium MBS are at risk but holders of these securities are paid to take the risk and understand how refi works. Think of the GSE guarantee as an insurance program (it is). If you had the opportunity of increasing the premium you receive (the g-fee) while at the same time reducing the risk of loss, would that not be a good thing to do.

There is lots of misunderstanding of these so called refi plans. Promoting refi's of EXISTING GSE loans in fact DECREASES the risk to the taxpayer in that the credit risk of these loans are already owned by the government. Refinance of non-agency loans to be guaranteed by FHA or any other govt entity is very RISKY and ADDS to taxpayer risk. Holders or premium MBS are at risk but holders of these securities are paid to take the risk and understand how refi works. Think of the GSE guarantee as an insurance program (it is). If you had the opportunity of increasing the premium you receive (the g-fee) while at the same time reducing the risk of loss, would that not be a good thing to do.

for example, if a homeowner is paying 6.5% rate with a 30 bp g-fee, is it not a win/win for the borrower and the taxpayer for him to refi into a 4.25% loan with a 50 bp g-fee. Agency gets 20bp more g-fee, borrower is paying a lower rate therefore the holder of the credit risk (taxpayer/gse) is better off. Only losers are the holders of the premium MBS bonds that have NO CREDIT risk but are earning above market rate interest- Plus they have been paid for the risk. G-fees and underwriting changes have happened many times in the past and is really not a big deal for the agency MBS market.

THe one thing the govt must NEVER do is to allow non-agency underwater borrowers to refi into AGENCY loans or to allow principal forgiveness on agency loans. DEMARCO has been really good about that.

The g-fee is what F/F commanded from their originators to wrap the loans. Big companies negotiated it down to 10bps pre crisis. Only small fry cos. were paying north of 25 bps. Regardless, there is a new "through the cycle" cycle to consider, and we know riskless assets are anything but. Housing is dead for another 10 yrs, refi plan or not. Such is the way of cycles.

Thanks, Bruce. Nice to hear that Ed DeMarco is standing up for the taxpayer, but I think the real question is, Who is Richard Shelby standing up for?

If you had to pick a poster child for everything that's wrong with American politics, Alabama Senator Richard Shelby would be an excellent candidate. Elected as a Democrat in 1986, Shelby switched to the Republican side one day after the Repubs won control of the House and Senate, in 1994, in order to join Newt Gingrich's Contract With America. He has faced no real reelection challenge since then.

Shelby oversaw the Senate Committee on Intelligence 1995-2003, both before and after the 9/11 attacks.

In Feb. 2010 he put a hold on 70 Obama appointments because he wanted earmarks for the KC135 Stratotanker and the Marshall Space Flight Center, both projects in Alabama. One of the appointments Shelby opposed was of Peter Diamond to the Federal Reserve, claiming that Diamond "lacked the necessary qualifications." (Diamond was a professor at MIT, and had won the Nobel Economics Prize.)

I'll stop there, but, please, ask yourselves if Richard Shelby, who has been flinging feces around the political pigsty since 1986, is suddenly going to clean himself up and "contribute solutions" to this country's housing disaster.

I always enjoy your articles. Thought provoking....and we need more of that for sure!

I agree with those who demand 20% down minimum.

Lenders should be required to keep at least 50% of the loan so they have a stak ein the game. Otherwise they hand money out recklessly to people they know canot afford the mortgage and hand the loan over to Wall Street to slice and dice it and in many cases misrepresent it.

" ... trying to come up with programs that would aid underwater homeowners. This problem is, by far, the biggest domestic drag on the economy."

It is a problem but not THE problem and not in the way it's presented. Housing is a means to create debt, not the other way around. The 'problem' with housing debt for the past five years or so is cash preference over credit (and herding behavior).

Lenders want the dollars in hand (rather than the houses) because the same dollars are exchangeable on demand for a valuable physical good (which is then burned up for nothing. The houses are a large component of the 'burn up for nothing' dynamic. The 'nothing' is the loss-leader of the 'house' part.)

See the problem, now? It is also called 'eating the seed corn' or 'killing the golden goose'.

We take the goose carcass and make a lead version, now it must be 'refinanced' as if this process is meaningful in some way. Good luck w/ dat! The recalculation of zero is zero, worthless is worthless (and valueless at the same time).

Little kids have imaginations, mud pie tastes great! The biggest drag on the economy is the economy itself. It has outlived its usefulness ...

Thanks Steve, love your comments and especially your blog. PS. Cannot rate you when you start with a quote.

And you are right. Houses represent leveraged credit expansion in the form of fractional lending for the banks but recently also a winfall in the form of an insurance payout in the case of a default. Either way, it's a WIN WIN WIN WIN for the bank that expands the credit into existence as debt and collects real dollars back from productivity.

Vendetta: I think you might be wrong about Shelby and Oxley being responsible for Falcon's firing. In fact (and I am no apologist for the Republicans), the House Republicans stood up for Falcon (it was Maxine Waters, Barney Frank and other Dems who wanted him fired), and pushed through a bill that would tighten oversight on Fannie and Freddie. However, when the Senate went to write a bill (much tougher than the house version), Chris Dodd (D, CT) threatened a Fillibuster in the Senate, and the whole effort to rein in F/F died. Then, in 2006, the Dems got control, and the ENTIRE effort to rein in F/F was shelved. I can't say I am 100% correct on this timeline, but I was at the House hearings in 2005 when they finally figured out Raines was triggering big bonuses with inflated earnings, and the Repubs were singing Falcon's praises.

That's possible, but the gop could have just said something in a press conference to let the public know ... if they truly were defending a system that is now on its last legs. Most democratic constituents would be calling dodd and frank and the rest of them to raise hell with them. At the time that I read about these things which I don't remember whom I first read about it (could've been LaRouche), other sources were saying it was goldman sachs that told bush to get rid of Falcon. Bush would have had the clout to do so, with goldman sachs backing. At that time, it would have been to the democrats advantage to let this out into the public to swing the election. Lockhart, Falcon's replacement, was a bush insider:

"That's possible, but the gop could have just said something in a press conference to let the public know ... if they truly were defending a system that is now on its last legs."

Fiscal conservatives (pub & dim) were raising hell.

Raines was caught juggling the books and most if not all of the real beneficiaries of this scam can be found on one side of the equation from Rubin to that serial monetary rapist Jim Johnson on down to the "Friends of Angelo".

The only people who were completely screwed is the poor with now shattered credit and naturally, the taxpayer.

The truth of the matter is this, it was "public policy" to make these loans. No one at the top gave a flying fuck if the loan was ever paid off as anyone coming before the camera to say "this is fraud" would be branded a raaaycist by the Fourth Estate and so they continued on looting million dollar salaries & bonuses...until it blew.

Thats why you will never see anyone serve a day (not even a minute) in jail for this...it was "public policy"...it was the law.

The law was, in reality...the systematic monetary rape of the taxpayer, by the privelged, with the poor used as human shields.

As a side bar...for Newt, to come before the country proclaiming himself to be a fiscal conservative, after taking any money, for whatever reason (even a penny) from this fraudulent operation, is not only laughable but a slander to anyone who is a fiscal conservative.

Those are just the facts...and I really had to get that off my chest, I feel much better now ;-)